Bosideng (HKEx: 3998)

In the world of public market frauds, we believe that the executive management of Bosideng International (HKEx: 3998) (“Bosideng”, the “Company”) are as corrupt as they come. Bosideng’s story includes many hallmarks of a public market fraud, including overstated revenues and profits, undisclosed related party transactions, and overpayments for acquisitions from undisclosed insiders at astronomically high prices.

Our due diligence efforts have uncovered a number of ways Bosideng’s patriarch Chairman Gao Dekang (“Chairman Gao”) and his conspirators stole from Bosideng minority shareholders, including:

 Bosideng included RMB 807 million of fabricated profits in its reported financial statements to generate investor interest.
 Bosideng artificially overpaid RMB 2 billion for multiple acquisitions from undisclosed insiders.
 Disposed RMB 56 million of real assets at bargain prices (in the case of Bosideng, RMB 5.4 million equal to 10% of initial consideration) to Chairman Gao.
 Significant historical dividends paid to Bosideng insiders who own 65%+ of Bosideng’s shares outstanding

PRC Credit Reports show that Bosideng fabricated RMB 807 million of net profits since 2015, an overstatement of 174%!

An analysis of Bosideng’s PRC subsidiaries’ Credit Reports revealed large balances of undisclosed receivables and undislcosed payables that appear to be a result of significant inter-company sham transactions (and possibly with Chairman Gao’s private entities) used to fabricate transaction volumes that manifested as fabricated profits on Bosideng’s reported financial statements.

Despite Bosideng’s claim that its primary acquisitions were purchased from independent third parties, Equity Transfer Agreements from SAIC Filings show that each of Bosideng’s three primary acqusitions were purchased from one of Chairman Gao’s conspirators, Mr. Chow. The modus operandi appears to us to be that Mr. Chow would buy a little- to no-cost apparel brand and then sell it to Bosideng within one to three years at a consideration up to 40x higher than what Mr. Chow initially paid for the asset.

Using this strategy, we believe that Chairman Gao and his conspirators have already siphoned RMB 2 billion in cash and stock out of Bosideng by flipping little to no value apparel brand assets to Bosideng at artificially inflated prices.

As icing on the cake, it appears that Mr. Chow holds production facility assets for Bosideng’s brands in his own private companies, one of which filed for a competing Jessie trademark. In addition PRC Credit Reports show that the Chairman transferred one of Bosideng’s property assets into his own private company but failed to ever pay the consideration for the asset!

As Bosideng’s fabricated profits scheme is uncovered and Bosideng’s short-term liabilities become due, we expect that Chairman Gao will decide that stolen funds would be wasted by propping up the share price of a vehicle that was always meant to crash and burn.